Real estate remains a trusted asset class for many investors seeking cash flow, appreciation, and diversification. However, the emergence of real estate equity crowdfunding platforms over the past decade provides an alternative route to fund property projects while potentially earning outsized returns. This innovative model allows both accredited and non-accredited investors to directly own shares in individual commercial or residential developments.
By pooling capital from multiple backers, real estate crowdfunding expands access to large-scale properties historically only available to institutional investors and high net worth individuals. But understanding key differences in structure, risk profiles, liquidity, governance rights and more is imperative before allocating funds. This article outlines everything you need to know when weighing real estate equity crowdfunding vs conventional property investment
Background on Real Estate Equity Crowdfunding
Also known as real estate syndication, equity crowdfunding applies the broader crowdfunding concept of raising funds from a large group of people via the internet to the property sector. Over the past decade real estate platforms have enabled wider investor participation into income-producing assets like apartment buildings, hotels, storage facilities, data centers and more that cash flow from tenant rents.
Vetted project sponsors source the deal, oversee development and manage eventual operations while taking carried interest and fees. Investors own equity shares proportional to individual funding contributions, aiming to profit through cash distributions and long-term appreciation at sale. Leading real estate crowdfunding platforms like Crowdstreet, Realcrowd and EquityMultiple have financed billions worth of property, with average project holding periods between 5-10 years.
Comparing Investment Structures
Traditional real estate investing has favorites like flipping houses, buy-to-rent single family homes, REIT investing and private syndications. Below we contrast some key structural differences of real estate equity crowdfunding by asset class
Flipping Houses: House flipping involves purchasing undervalued properties, completing renovations, and quickly reselling for profit. Unlike crowdfunding models where teams handle sourcing and project management, house flippers must self-source deals, fund entire purchases individually and manage renovations with sole capital risk.
REIT Investing: Investor exposure to portfolios of rental property assets via real estate investment trusts (REITs) offers liquidity and diversification. But these are still pooled public market vehicles with structural limitations on returns compared to direct ownership of private property made possible through crowdfunded syndication.
Buy-To-Rent Single Family Homes: Becoming a direct landlord delivers passive income but requires substantial upfront capital for each property with ongoing maintenance responsibilities that crowdfunding delegates to experienced sponsors.
Private Syndication: Conventional syndication also allows individual participation across larger asset investments alongside other high net worth backers through General Partners. However, minimum investments often range from $50k to $100k, restricting non-accredited investors.
Risk Profile Comparison
All real estate investing carries risks like changing property values, rental demand fluctuations and leverage exposures. But subtle structural differences influence risk-return profiles.
House Flipping: As sole asset owners, flippers assume entire downside without portfolio offsets available to crowdfunding where each project is one share of a diversified basket. However theoretical returns are higher from full sales proceeds.
REIT Investing: REITs provide systemic risk protection via broad diversification. But limits on leverage and short-term profit focus often hinder returns compared to core property held long-term in crowdfunding schemes with lower liquidity but higher total profit at sale.
Buy-To-Rent Single Family Homes: Assuming sole responsibility for home purchase debt and maintenance issues can sink investor profits without support teams in crowdfunding syndicates to handle such problems across hundreds of tenants.
Private Syndication: Syndicators spread risk across fewer high net worth backers, each investing larger sums compared to crowdfunded models allowing smallerslice diversification. However lead sponsor stability risks still apply.
Real estate investments are inherently illiquid with lengthy holding periods before property sales or refinancing distributions. But certain structures carry greater flexibility to exit positions.
House Flipping: Assuming renovations go to plan, flippers can exit once resold in months. But until finding a buyer, 100% of funds are locked up. Crowdfunded shareholders can access liquidity through interim dividend payments and secondary platforms.
REIT Investing: Investors enjoy daily liquidity on public markets. But instability risks mean many hold REITS long-term regardless, closer to crowdfunding. And earned dividends don’t benefit from property appreciation at sale like crowdfunding.
Single Family Rental Homes: Attempting early sales to liquidate rental properties carries substantial transaction costs. However underlying property sales happen faster than eventual commercial asset exits with crowdfunding requiring years.
Private Syndication: Requires finding an interested buyer to take over stake or waiting for agreed holding period of the overall asset to expire, likely longer than corresponding crowdfunding timelines.
Governance Control Factors
Control privileges over factors influencing investment outcomes varies greatly by real estate investment strategy chosen.
House Flipping: Full owner autonomy over purchase decisions, renovation direction, contractors hired and sales timing. But also 100% liability for those choices gone wrong.
REIT Investing: As tiny shareholders in gigantic public vehicles, individual investors have negligible governance input or operational oversight. Projects rarely align with personal preferences.
Single Family Rental Homes: Total authority over buying parameters, tenant selection, property managers hired, leasing durations set and future sales decisions.
Private Syndication: May consult with General Partners on certain investment decisions but limited minority sway over core asset strategy or implementation. Lead sponsors have ultimate authority.
Real Estate Crowdfunding: Project sponsorship team handles asset acquisition, business plan execution and day-to-day asset management with obligation to provide transparency through investor updates. But shareholders can’t dictate core property decisions.
Ideal Investor Profiles
Based on the structural trade-offs outlined above, certain investment strategies align better to specific investor profiles depending on factors like capital, knowledge, time and more.
House Flipping: Extremely hands-on investors only. Requires deep real estate expertise and healthy risk appetite alongside large personal capital reserves to individually purchase, upgrade and sell homes.
REIT Investing: Better suited for passive investors lacking specialized real estate skills. Also easily accessible to non-accredited investors wanting simple diversified cash flowing real estate exposure without large minimums.
Single Family Rental Homes: Strong fit for direct landlords with sufficient time for property oversight and moderate capital to acquire multiple homes. Allows further scaling through supportive property managers once constructed.
Private Syndication: Optimized for accredited investors already actively investing in real estate given minimums can restrict others. Also better match for overseas investors unable to directly oversee US based properties.
Real Estate Crowdfunding: Democratizes deal flow historically reserved for elite circles only. Lets both accredited and non-accredited investors participate across institutional grade assets with hundreds of other shareholders through guided online process. Delegates all manual oversight to experienced lead sponsors.
Real estate equity crowdfunding continues to disrupt conventional property investment by introducing digitally powered, low-minimum models granting individual exposure into assets like major apartment complexes with projected returns rivaling alternatives. By evaluating respective structural trade-offs around risk, control and liquidity against personal preferences, both emerging and experienced real estate investors can determine optimal vehicles to allocate capital towards.
This content has been generated by an artificial intelligence (AI) system. While the information provided is based on extensive data and trained models, it should not be considered a substitute for professional advice. Please use this content thoughtfully and verify the information for your specific needs. We do not take responsibility for any actions taken based on the content generated by AI.